Low Appraisal Cancels Financing For Buyer

Q: Recently we entered into an agreement to purchase a house. We were going to do a loan based on the seller’s appraisal of the house, so that we could get 100% financing. When the real appraisal came in, it was $5,000.00 below what the sellers had said and now the lender says we cannot do the original loan and that we must show that we have an additional $8000.00 in the bank (which we do not). Consequently, we could not finalize the sale.

We decided to give the sellers our initial down payment money in good faith. However, they refused the money and have now started legal proceedings to sue us. Their reasoning is that we did not have a loan within the 30 days as the contract stipulated. My real estate broker has offered to pay our closing costs so that we can use our closing money to qualify for the loan. My question is can we be sued and should I take my chances in court or take my realtor’s offer?

Ilyce, I listen to you on WSB and this is a situation my parents (who live in Florida) are facing. Can they really be sued for having to back out of the deal because they could not secure financing. The lender has said they cannot qualify for the loan now that the appraisal came in below value. They are going to consult a real estate attorney but my question is do the sellers have a case?

A: They may have a case.

If your parents had a financing contingency in their contract, it would say, the buyers must qualify for such and such loan by such and such date. If they didn’t qualify, the contract would terminate. In fact, that’s what happened. The only appraisal that counts is the banks. I don’t know what you mean by the sellers’ “Appraised value” that doesn’t sound real to me. Anyway, the price came in lower and the property didn’t appraise out in value.

But if your parents didn’t have a financing contingency, then they could be sued to force the sale.

Your parents must IMMEDIATELY seek the advice of counsel. And, I know I don’t need to keep hammering the point home, but this is why people use real estate attorneys to close deals, and not brokers. Georgia residents are at a huge disadvantage by not having real estate attorneys as part of their deals.

I wish your parents good luck and hope they have better luck next time. 100 percent financing is expensive. Perhaps they should consider buying something less expensive so that they don’t stretch themselves so thin.

One Comment

As usual the appraiser gets the blame for something on which the homeowner and writer should have been more educated. The fallacy, is the value of a home always increases, but the estimates of value are actually gleaned from the market and follow market trends. Appraisers report the market and should be able to defend their value with that market information. Subsequently, there is no such thing as a “low appraisal“, there is however, a figure that may not meet your expectation. My job as an appraiser is to inform the investor, be it a borrower or the bank, of market conditions to aid/ensure investor confidence in making the decision to invest(or not). The value in your home, up or down, is following market trends, live with it. If you have been using your home as an ATM you’re out of luck and you are probably complaining about the “low appraisal problem” due to your confusing the difference between want and need when refinancing. The HVCC didn’t help the “appraisal albatross” in any way. The “new more improved” version of the HVCC didn’t help either. The HVCC did however place an additional tier of management between the appraiser and the investor that increased the cost substantially to the borrower when applying for a loan. The external pressures from the AMC to ”hit a value” are still there, except now the borrower is paying the management fee for that safety net which is now being hidden as appraisal fees on the closing docs(the management fee and the appraisal fee are billed as one figure).In effect it has done absolutely nothing except increase the refinance cost and make a profit for the AMC’s which are generally owned by investors that are lending the money in the first place-go figure! The appraisal management companies, charge more for appraisals but have dropped their fees to appraisers in general by 50% and sometimes 60% of the appraisal fee previous to HVCC. The values however are still following market trends, the appraisers are still getting blamed for ”low appraisals” and writers are still making inane uninformed comments vilifying appraisers, and everyone is hoping the HVCC will ferret out “low appraisals“. Most appraiser will tell you, HVCC has decimated the appraisal system, the pressure is still there, the qualified licensed, designated, long term appraisers are not, they are leaving the profession in droves. There are increased costly appraisal regulations, increasing the costs of appraisal businesses, increased cost to the borrower, there are no appraisal marketing costs as we are now unable to have direct contact with a mortgage broker, putting them out of business too as we are now selected by management companies to work for them at a figure they decide is customary and reasonable. This is unfortunate for appraisers, as the AMC’s are the companies that now run the industry. The real crux is that the values of homes still follow market trends and the results of an appraisal are not generally affected by the HVCC stipulations as regulations were already in place prior to the HVCC being the unneeded panacea implemented last year. The only benefit of the HVCC is that the AMC companies(read bank) are making a lot of money charging the borrower under the aegis of the appraisal fee and letting the appraiser take the heat for the additional costs, relying on the urban myth that it’s the bad appraiser with a problem when the value comes in “low”. The estimate of value still follows market trends as our data is taken from the market.